Business:
Assif Online - Volatile Markets
Made more so by the swings in oil prices By ASSIF SHAMEEN

September
12, 2000
Web posted at 6.00 p.m. Hong Kong time, 6.00 p.m. EDT
Until recently, the main concern in global markets has been inflation. To
nip this bad apple in the bud, the U.S. Federal Reserve has in pre-emptive
moves been hiking interest rates since last year. That cycle ended about
three months ago. The equity markets are now reflecting the fact that U.S.
Fed Chief Alan Greenspan is done with raising rates -- for a while yet.
The global bond markets, when you cut out all the gobbledygook, are basically
telling us that not only is the Fed done with raising rates, there actually
could be a rate cut sometimes between March and June next year. Thus the
strong performance of financial sector stocks on Wall Street in recent weeks.

But while equity and bond markets are reflecting all the good news, at least
one part of the commodity market, oil, is pointing the other way. But more
on that later. The Forex markets -- which normally move in tandem with interest
rates and economic fundamentals -- are fairly volatile right now. The European
Central Bank (ECB) raised rates two weeks ago only to see the euro weaken
further. Meanwhile, the Bank of Japan ditched its zero interest rate policy
last month, saying there will be no more rate hikes for the foreseeable
future. The yen has strengthened. The dollar remains almighty.

With high
productivity growth in the U.S. and no signs, yet, of inflation, money from
all around the world is just pouring into American assets -- equities, bonds,
property, private companies or anything else they can get hold of. The result
is that U.S. dollar continues to strengthen as demand for dollars just grows
and grows. In the past few weeks, Deutsche Telekom has bought U.S. cellular
operator Voicestream, Credit Suisse has bought U.S. investment bank Paine
Webber and its its main rival in Switzerland, UBS, has bought investment
bank Donaldson Lufkin Jeanrette (DLJ). Just these three deals total nearly
$100 billion. The buzz is that Deutsche Bank, which paid $20 billion for
Bankers Trust two years ago, is now ready to pounce on another investment
bank, J.P. Morgan, which could be worth $30 billion to $35 billion. Scores
of German, French and British companies are making or scouting for deals
worth tens of billions of dollars. Most of the deals are one way -- acquisitions
in the U.S. Very few U.S. companies are actually engaged in overseas shopping
sprees, even though the strong dollar makes the rest of the world looks
like a bargain for Americans. A few more big cross-border deals and stronger
U.S. equity markets would mean much a weaker euro, even if the ECB continues
to raise rates.

The limp euro and strengthening oil prices are putting pressure on some
of the smaller Asian currencies, like the Philippine peso and Thai baht
(both of which have seen two-year lows in recent weeks). The Singapore dollar
and Australian dollar, which more or less correlate with the euro, have
been weaker too. The rupiah has held up well only because of the spike in
oil prices.

So, what about oil ? The reason equity and bond markets are fairly unconcerned
about the skyrocketing oil prices is because almost everyone seems to believe
that the oil price rise is temporary. Moreover, even if the prices are sustained
at $30-$35 levels for a while, U.S. productivity growth and economic slowdown
would more than counter the impact of higher oil prices. Oil prices are
leading not lagging indicators of demand and the lead is about three to
four months. September and October are normally the peak. As the Northern
Hemisphere goes into winter, oil prices actually start to taper off because
oil prices start to reflect the spring demand. A milder winter this year
would drastically depress oil prices. A severe winter -- given current shortages
-- will add fire to the fuel prices.

Capacity constraints mean OPEC just can't open up the taps much further.
Some analysts believe that, excluding Iraq, OPEC has no more than 1 million
barrels a day of spare capacity. (Last weekend's agreement raised the daily
quote by 800,000 to 26.3 million barrels a day.) High prices and slightly
severe early winter would combine to play havoc with the oil market and
might bring Greenspan back to his rate-rising work.

Oil is a sword that cuts both ways. Among the big winners in Asia are the
likes of Indonesia and Malaysia. Indonesia, which pumped 1.1 million barrels
in at the depth of its recession and political turmoil in 1998, got an average
of just over $13 per barrel from its oil in 1998 or $5.3 billion. Now Indonesia
is pumping 1.37 million barrels a day. This year with an average daily production
of 1.35 million barrels and average price of about $30, Indonesia could
earn over $14.8 billion from oil alone -- or two and half times what was
provided for in the budget. (Indonesia also exports gas and chemicals, which
are also fetching higher prices so the overall bonanza for Indonesia is
actually much bigger, though it still imports cheaper oil for its own domestic
use.) Malaysia's 700,000 barrels a day for mostly light and sweet crude
(which sells at a slight premium) might average $30 per barrel this year
or $7.6 billion in total.

Among the losers are Japan, Korea and Taiwan, which are all large net importers
of oil as well as gas. But with huge additional income from exports of electronics
goods as part of the global Information Technology boom, they can easily
afford to pay more for oil. Bigger losers are the likes of the Philippines
and Thailand, which are stuck with a few additional billion dollars on their
import bill, higher inflation and bigger budget deficits because the governments
haven't been able to pass on higher prices to citizens fast enough. That
is depressing the currencies, derailing already fragile economic recoveries
and pushing down the stock markets as foreign investors either stay on the
sidelines or sell out. And where might those proceeds be going? Three guesses,
as the Americans say.